GST: Consumer industry braces itself for a drop in margins on all sales channels

Entrepreneurs in the consumer industry, say auditors, are yet to understand the methods of filing GST and there will be more than three billion invoices uploaded in the first 10 days.

India’s biggest financial reform is round the corner, but not everyone is ready yet. Unlike demonetisation last November, this time around, businesses have to prepare for this tax reform.

It is almost midnight and the founders of the brands Scott, Fit&Glow and MCaffeine are running around their warehouses with a ton of invoices of the stock that was shipped in late May. Abhishek Parihar, Manish Chowdhary, and Vikas Lacchwani are receiving calls from distributors about rate changes and how the distribution chain will be compensated with the hike in GST.

This stock must be sold quickly or it will turn into an accounting nightmare after July 1, thanks to the Goods and Services Tax (GST) coming into force that day.

Manish Chowdhary, Co-founder of Fit&Glow, a wellness care brand, is being hounded by a few distributors as they do not want the GST to eat into their margins of six percent. “I have no choice but to absorb the tax because they won't sell the product,” he says.

Most brands will increase their prices by 11.30 pm on June 30 and consumers are going to be paying more for several products from July 1. [Read more about GST rates here.]

The impact will also be on e-commerce platforms. Companies like Amazon have told the brands above that they cannot pull back stock from the warehouses and promised them that they are going to make the stock GST-compliant. This also means margins on unsold stock will come down and brands will have no choice but to hike the prices of current products to make up for the margins as well as to compensate the distribution chain.

How GST hurts the margins of brands

Say a brand is selling a shaving cream or shampoo at a maximum retail price of Rs 128. In the previous tax regime which charged 22 percent by including VAT, state tax and excise tax, its gross margin on the product was Rs 12.8 or 10 percent.

Under the new regime, where skin care products will be taxed at 28 percent, the margin will fall if the brand does not cover for the 600 basis points rise in tax. Now the company must increase the price of the product to Rs 135 in order to maintain the 10 percent gross margin. Or else it will end up losing at least Rs 6 on the current price because it has to reduce its factory gate cost. Combine this with distributor margins, and the margins will further decrease if they keep the old price.

Like Manish there are several others stuck with managing the GST.

Abhishek Parihar, Founder of SagarFab International, who sells the brands AWG and Scott, has to watch out from two perspectives because he is a manufacturer and a distributor. Firstly, he has to ensure that once the product leaves his factory gate he ensures that he uploads the GST invoice on to the GST portal and then he has to also make sure that his distributors upload their invoices so that they can claim tax credit and avoid double taxation.

“It will take us a good five months to understand the system,” says Abhishek Parihar. He has already prepared his company to ensure that the pricing of the product from July 1 on e-commerce portals increases.

Don’t forget to upload

There are six million SMBs that have already registered and become GST compliant. There are four million more that will register from June 26 for the final leg of registration before July 1st.

The GST process itself works like this. Say the manufacturer makes a sale to the wholesaler on July 1.

• July 10: Manufacturer uploads the invoice on the GST portal.
• July 15: The wholesaler uploads his invoice.
• July 20: Government compares both invoices and the reconciliation of the net tax happens.

This would happen three times a month and therefore 36 times a year. The actual number is 37 because you have to upload an annual filing too. Sources in the government and the corporate world suggest that there will be more than three billion invoices uploaded into the system by July 15.

Intuit, the $4.7-billion financial technology giant, is conducting workshops for the SMB ecosystem on how to become GST-compliant. “We have ensured that every product code of the GST is captured and our SMBs can use the tool to take care of their accounts,” says Nikhil Rungta, MD of Intuit. The government has set up 34 GST Suvidha Providers (GSP) to help people with GST filings.

According to ClearTax, GSP as a term has been tossed by GSTN (Goods and Service Tax Network), which is a private company in which central and state governments collectively hold 49.5 percent stake. GSTN has been set up with the sole objective of development and maintenance of IT infrastructure for GST implementation in India. This is in line with the Digital India initiative for a paperless tax compliance regime and brings more ease in doing business. ClearTax is a GSP. Some well-known names are Motherson Sumi Infotech, NSDL e-Governance Infrastructure, Ramco System, Karvy Data Management, Reliance Corporate IT Park and Tera Software

“I think people will learn from July about the entire process. Mistakes will be made and losses will happen,” says Vikas Lacchwani, Founder of MCaffeine, another consumer skin care brand.

Integrated GST/State GST/Central GST

Logistics companies have to prepare their clients to understand the multiple taxes if their product crosses multiple states. If anything, the logistics costs will come down because logistics need not go through the hassle of filing multiple state tax invoices. The whole point of GST is to reduce multiple invoices thanks to inter-State logistics, now brands plan to have fewer warehouses and operate out of single large warehouses to supply to other regions in the country with just one invoice that will capture the entire incidence of tax.

“The GST captures the origin and place of supply. That’s how the rates are calculated by comparing the supplier and the recipients invoice and this is how you input tax credit,” says Ankit Sethia, Founder of HipShip, a logistics company. He says the only difficulty could be to track the number of logistics vendors in the chain and make sure that they are all GST-compliant.

Perhaps the good thing, which the government announced recently was to do away with the collection of TDS of up to two percent from wholesalers by distribution companies. “This is a good move because wholesalers work with very thin margins. If we deduct two percent from their sale, then it impacts their margins,” says Anish Basu Roy, Co-founder of Shotang.

All companies are indeed confused about the implications of GST. Everyone is dependent on their accountants to ferry them through the confusion. Nevertheless, the biggest reform to unite the country has begun. If it succeeds then the tax reinvested into the infrastructure could get business to get things done quickly, which would be to reach the product to market on time.